ourEconomy: Opinion

The government’s wrong. We can afford public sector pay rises

OPINION: There’s one obvious way to fund public sector wage increases: tax the wealthy

James Meadway
15 December 2022, 7.30pm

Public sector workers are experiencing a huge real terms pay cut

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Dan Pearson / Alamy Stock Photo

With strikes now spreading across the public sector, including a historic, first-time strike action by the Royal College of Nurses, political questions around union activity are being forced open in a way that we have not seen in British politics for three decades.

Not since the major union defeats of the 1980s have trade unions struck on this scale in Britain. That long period of industrial calm, when for decades strikes became almost unknown in this country, seems to have left the Conservative government – already riven with political divisions – unable to think and act strategically against collective action by hundreds of thousands of determined public sector workers.

The Tories, instead, have made a bad situation for themselves appreciably worse through thoughtless belligerence. Despite their increasingly ferocious press campaign against the strikes and the unions, they are a long way from any victory.

It should be no surprise that workers in the public sector are angry. Latest figures from the Office for National Statistics show that, with inflation running still at 10.7%, wage rises in the public sector average just 2.7% – a huge, real terms pay cut, and well behind average private sector pay rises of 6.9%.

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This comes on top of a decade of pay freezes and pay restraint in the public sector as austerity bites, contributing to the severe staff shortages across the sector. The NHS, for example, is short of 47,000 nurses.

So public sector workers aren’t paid enough. But can we afford to pay them more?

The government has been insisting that we can’t, claiming that inflation-matching pay rises would cost £28bn – or an alarming £1,000 for every household. “What I’m not going to do is ask ordinary families up and down the country to pay an extra £1,000 a year to meet the pay demands of the union bosses,” said Rishi Sunak.

That last claim was always a bit dubious – even £28bn of extra government spending wouldn’t necessarily turn into £1,000 for every household, because we have a tax system that is at least a bit progressive. Richer people tend to pay somewhat more in tax, poorer somewhat less.

But it’s actually worse than this. As I examine on my new podcast Macrodose, the government’s own accounting is wrong. The £28bn figure comes from assuming an 11% pay increase is paid for the whole public sector. But pay rises have already been budgeted for by the government, typically of around 3%. So these existing pay settlements need to be removed from the total. That brings the figure down, according to the BBC’s Reality Check, to about £18bn.

Then there’s the fact that, if people are paid more, they will in turn be paying more in taxes. Roughly a third of the total pay increase will come back to the government in this way. That gets us to a true cost to the government, of a public sector pay award matching inflation, of £12bn.

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The original £28bn figure is nonsense – even the Treasury can’t defend it, with the department’s permanent secretary forced to claim that it had not “emanated” from the department in a grilling by MPs.

The more accurate figure of £12bn is still a substantial amount. But on calculations made by Savvas Savouri, chief economist at Toscafund Asset Management, it is about the same as the reduced cost of government borrowing since September’s disastrous “fiscal event”. Back then, with Kwasi Kwarteng promising huge, unfunded tax cuts for the rich, financial markets panicked and the government’s borrowing costs shot up.

Those costs have now fallen significantly, and so the government has more room to borrow against its own targets for the debt, as set out in the Autumn Statement – just enough to make an inflation-matching public sector pay award.

Another option is to tax the wealthy properly. Equalising the rates of capital gains tax, paid overwhelmingly by the very rich, with income tax rates would bring in £16bn a year.

"Winter of Discontent"

Even City economists and establishment figures have started to turn against the government’s hard line in the last week.

The former head of the Treasury, Sir Nicholas Macpherson – the man who oversaw austerity in the 2010s – approvingly cited a Times article attacking the idea that the so-called “wage-price spiral” is a real threat, and saying the government needs to pay workers. Financial Times chief economics commentator Martin Wolf made the same point in his column this week. Former Monetary Policy Committee member, and current chief economist at Citigroup, Willem Buiter, said the same thing.

“Public sector class warfare” will be coming throughout next year, Buiter told Bloomberg, if the government doesn’t settle now. He argues that the Tories should learn from the real example of Margaret Thatcher. Thatcher made a 25% pay award for public sector workers in her first year in office, motivated by a desire to avoid a second “Winter of Discontent”. This wasn’t about Thatcher being a friend of the unions. Having settled with the public sector in 1979, her government immediately turned on the steelworkers in January 1980, dragging them into a bitter dispute – which they lost.

This was the key to Thatcher’s success in taking on the unions, with her government carefully picking its battles – paying off one group of workers over here, taking on a fight over there. A secret 1975 Conservative Party document, which became known as the Ridley Plan, laid the strategy out, saying the next government should seek to slice the trade union movement up “salami-style” in a series of set-piece confrontations conducted on the government’s terms – most famously, that of the Miners’ Strike of 1984 and 1985. Divide and rule was the aim.

In stark contrast, the cosplay Thatcherites in this government have set up an almighty battle royale with the trade unions, fighting across almost the entire public sector all at once. They are doing so seemingly without any clear strategy to win, or even a clear idea of what a realistic victory might look like – which has created an opening for the labour movement to press home its advantage.

If the government is waiting for inflation – now somewhat easing – to come down to more “normal” levels, easing pressures on wages and salaries and ending the current conflict, they will be waiting a long time. Even its own forecaster, the Office for Budget Responsibility, expects next year to end with inflation around 5%, significantly higher than the Bank of England’s 2% target.

A smarter government might (for instance) have seen the nurses’ dispute brewing months ago, and found a way to head it off – with an inquiry into the “special conditions” of NHS workers, or something similar, making a pay award as needed.

This would have created the opportunity to isolate and defeat the RMT or CWU, two unions with long records of industrial action. Instead, they have dug themselves into a war of attrition, across multiple fronts, hoping that currently favourable public opinion will turn sharply against the unions.

Even if the wiser heads prevail and the government moves towards a settlement, they will have left it so late that there is a good chance it will be seen as a climbdown for them – and a victory for the unions involved. Millions of other workers, also suffering near-record inflation rates, could learn from the power of a good example: industrial action works.

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